Abstract

Depending on the circumstances, U.S. equity investments in collateralized debt obligations (CDOs) may be governed by the Passive Foreign Investment Company (PFIC) rules, the Controlled Foreign Company (CFC) rules, or both. The PFIC and CFC tax regimes are exceptionally nuanced and, consequently, proper tax planning depends on a careful examination of the individual circumstances of the investor and analysis of the risks of the investment. This article focuses on tax aspects of equity investments in CDOs by taxable U.S. persons and the strategies that may effectively be used to maximize certain U.S. tax benefits. The discussion focuses on the characteristics of a typical offshore CDO structure, on advantages that U.S. investors in CDO equity may obtain by making a Qualified Electing Fund election (QEF election), the circumstances in which a QEF election is not advisable, and the interplay of the PFIC and CFC rules.